HOW TO LEVERAGE A PROPERTY!|| Manny Khoshbin

[Music] today I want to tell you guys an example of how to leverage your property at the right time on the right property and make millions with much a smaller capital so this property we're gonna talk about is called Shops at the Home Depot a small little retail center in Lake Forest California this property was bank owned 80% vacant there was only one tenant occupying 20% I was able to buy it for 2.75 million substantially below market value because it was distressed and it was bank owned and I was able to convince a hard money lender to loan me 2.4 million dollars which is about 85 percent loan to value a very high leverage and I was able to defer their payments for two years because I knew it's gonna take me two to three years to lease it up and this was in March 2013 so we were still dealing with recovery from the Great Recession so everybody was nervous and I saw that as an opportunity the property was fully stabilized um is fully leased within three years in mid-2016 little over three years I was able to refinance and pull out my phone either alone from that property I was about 3 million with all the deferred interest that was piling up on the hard money loan so I ended up owing about 2.9 million to the lender so they made a handsome profit they made about 500 grand and I didn't have to pay any loan payments for two years and the third year I started paying payments of course but the best part of the deal is I went in there with about five hundred thousand dollars out of my pocket to buy the property I put another two hundred thousand dollars in for leasing commissions and tenant improvements so I mean it for seven hundred grand cash and I was able to pull out two million dollars on a cash out refinance just three years later and that means I got all my money back and then some and now I'm playing with the bank's money right just like casino so I'm in it for a little over three million dollars that's 2.75 million plus my two hundred thousand I put in for rehab plus some loan fees and I was able to sell it for nine point two million dollars that net me over six million dollars profit on a 700 thousand dollar investment in just four years I was able to take seven hundred thousand dollars and make it into six million dollars and the beauty the best part of this transaction was I didn't have to pay any capital gains tax because I did a 1031 exchange and I was able to deploy that cash into another value add and just repeat the same process now let me show you the magic of leveraging when it comes to increasing your cash flow and a property let's say you got five hundred thousand dollars to invest you got many options right one option is to just buy a smaller property all cash and don't leverage the property or your purchase so let's say it's a four-plex and it's throwing up five percent cap rate which is five percent return okay so we'll put here cap five percent so $500,000 at five percent cap it's going to give you twenty five thousand a year in income and that's after popping tax insurance landscaper utilities fixing your laundry machines follow it now that's one option or you can buy a bigger property at the same return five percent cap rate and let's just say twelve units at five percent for two million dollars that means it's going to give you if you buy this cash you'll be throwing off one hundred thousand a year in net income so what with your net income now if you put 500,000 cash and you borrow 1.5 million loan and loans are about 3% of multifamily lenders are very aggressive because they love it is a very loss it's the lowest asset class in real estate as a collateral so they love it so let's say 3% loan so you're basically going to pay 45 thousand a year for your loan payment 3 percent of one point five forty five thousand dollars and what you have here is 45 thousand - $100,000 income it's going to leave you fifty five thousand dollars net income after your loan payments now you see how leveraging a deal you can substantially increase your rate of return on your cash so fifty five thousand divided by your cash of five hundred thousand invested is over ten percent I think it's 11 percent and then some so eleven percent cash on cash leveraging video versus five percent which is five percent you're not leveraging it so you're making five percent which is $25,000 five percent of five hundred thousand is twenty five thousand so here you can make twenty five thousand dollars a year on your investment or fifty five thousand here which one do you like better of course fifty five thousand a year the other benefit of leveraging it's much easier to double your money when you're leveraging in here you have to sell the property for double the price to double your investment in here all you gotta sell it for more is twenty five percent more so for two point five million let's just say you're not paying any commissions if you do you can bump it up a bump up the price but if you sell us for two point five million which is not a huge increase right you can easily do that now you've doubled your money so much easier to double your money when you leverage deals it gives you extra cash flow as long as your cost of money is less than the rate of the property cap rate so make sure it's not reversed if the property is throwing up 3% return on your borrowing at 5% is the exact reverse effect you'll be paying the bank for buying that real estate so that's a major nono and now how do you sell this for more 12 units all you got to do increase the income of each unit so to do that you do some minor improvements to the property maybe some landscape exterior paint change out the exterior light fixtures or maybe just change the interior carpet for the tenants remodel their kitchen what have you that's a little bit more costly but I usually like to do start with the minor exterior improvements because it's not as costly but when you do improvements is expected for tenant to pay more right you're putting money into the property and especially if their rents are below market and that's the other thing I never buy a property that the rents are not below market because I want to be able to go and increase the rents right so if you're at the market it's gonna be very tough to encounter any more income out of those units so let's just say you increase the income by a hundred dollars a month and that's 1,200 per month 14400 per year now if you take the same cap rate 5% and you take this divided by the cap rate that's gonna tell you how much you can you can pick up on the resale profit there so fourteen thousand four hundred divided by 0.05 so you just picked up two hundred eighty eight thousand dollars more on the resale value by just increasing one hundred dollars a month per unit that's easy other ways you can also increase value which I always want on my properties aside from increasing the rent another way you can add more net income is by reducing these expenses so let's say I have a gardener that's charging me 300 bucks a month I'll go bid it out to two other gardeners and I get it down to 150 so that's 150 bucks a month times 12 that's $1,800 you just saved and if you do that by a 5% cap I can't play it again 1800 divided by 0.05 you just picked up another $36,000 by just rebuilding one vendor and imagine if you got you know pest control or if you got a property manager that's a big expense you know and you can self manage it property managers normally charge you know four to five percent of net revenue so on a property like there's 12 units let's just use round numbers if it's 1500 a month per unit rent you collect times 12 that's 18,000 a month times 12 so it's collecting two hundred sixteen thousand a year gross alright so property managers typically charge about four to five percent sometimes six percent because apartments are more management intensive but let's just use five percent and that's ten thousand eight hundred a year so now if you go and drop that or you self-manage now you just picked up another ten thousand eight hundred more income because you're not you don't have to pay this expense so if you take that plus the eighteen hundred we saved from the landscaper and that's twelve thousand six hundred a year at a five cap that's another two hundred fifty two thousand dollars congratulations increase the rent hundred a month drop two expense items and now you can double your money really easily in the same market within a few months so I gave you guys two examples of leveraging a deal Lake Forest property which was Shops at the Home Depot that obviously is poor really seasoned investor like me to go out there and pick up a property with a 14% interest rate hard money lender eighty percent vacant but this is where I started I stopped buying multi-family homes increasing rents doing minor improvements and then also reducing the expenses thereby increasing the net income and flipping it and I probably did about 200 apartments in my early years from 2000 to 2002 and then I got bored with the apartments you know I wanted something more challenging and I love commercial real estate there's a lot more meat on the bone just like the Lake Forest property I give you example of but I hope you enjoyed this in the sample Matt never buy cash a property always leverage but make sure it's the right deal there is enough meat on the bone and make sure your timings right you know I say 90% is timing so if you buy in 2007 it'd be very difficult to do this or even this so make sure your timings right you're buying a distressed property that's got some value add component to it rents are below market and it's on TLC and so simple is so simple to make money you just got to know what you're doing so and that's why I'm here for so I hope you enjoyed the video if you want to learn more follow my mentorship classes that's the link below and where I dig into more of these deals and how to find these deals and how to leverage leverage is magic if you do it at the right time and the right property and you know what you're doing a lot of my success has been true trial and errors over the past 28 years have I had a mentor early on I would have saved a lot of money and lots of time and avoid a lot of pitfalls so lucky for you I'm giving you the opportunity to be mentored by me I created something I wish I had when I got started we call it many cars means millionaire mentorship

Channel: More Manny Khoshbin

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Keywords: Manny Khoshbin, Real Estate, Recession, 2020 Recession, Maket crash, investing, investing for beginners, investing in real estate, real estate investing, investing in your 20s, how to build wealth, how to build wealth fast, how i became a millionaire, Manny Khoshbin Real Esta, real estate market, real estate mentor, real estate investment, real estate investing for beginners, how to invest in real estate, how to get started in real estate, Leverage in real estate

Id: QRynerIV7wk

Length: 11min 50sec (710 seconds)

Published: Wed Apr 15 2020